Question

Charge Car P/L is considering a project to launch charging stations for electric cars around Australia. The initial investment is expected to be $100,000,000 and the term of the project is 6 years. The required rate of return from the project is 14% p.a. The annual cash flows are outlined in the following table:

End of year	Cash flow p.a. ($m)
Year 1	20
Year 2	22
Year 3	25
Year 4	30
Year 5	34
Year 6	37

1. Based on Charge Car’s required rate of return would you recommend proceeding with this investment? Present all calculations to support your answer.
2. Would you change your opinion if Charge Car’s required rate of return increased to 16% pa? Present all calculations to support your answer.   

Please provide your answer with proper formula and procedure.

Answer 1

(a)-Net Present Value (NPV) of the Project if the required rate of return is 14.00%

Year	Annual cash flows ($)	Present Value Factor (PVF) at 14.00%	Present Value of annual cash flows ($) [Annual cash flow x PVF]
1	20,000,000	0.877192982	17,543,860
2	22,000,000	0.769467528	16,928,286
3	25,000,000	0.674971516	16,874,288
4	30,000,000	0.592080277	17,762,408
5	34,000,000	0.519368664	17,658,535
6	37,000,000	0.455586548	16,856,702
TOTAL		103,624,078

Net Present Value (NPV) = Present value of annual cash inflows – Present Value of cash outflows

= $103,624,078 - $100,000,000

= $3,624,078

YES. The Investment should be accepted, since the Net Present Value of the Project is Positive $3,624,078

(b)-Net Present Value (NPV) of the Project if the required rate of return is 16.00%

Year	Annual cash flows ($)	Present Value Factor (PVF) at 16.00%	Present Value of annual cash flows ($) [Annual cash flow x PVF]
1	20,000,000	0.862068966	17,241,379
2	22,000,000	0.743162901	16,349,584
3	25,000,000	0.640657674	16,016,442
4	30,000,000	0.552291098	16,568,733
5	34,000,000	0.476113015	16,187,843
6	37,000,000	0.410442255	15,186,363
TOTAL		97,550,344

Net Present Value (NPV) = Present value of annual cash inflows – Present Value of cash outflows

= $97,550,344 - $100,000,000

= -$2,449,656 (Negative NPV)

NO. The Investment should not be accepted, since the Net Present Value of the Project is Negative $2,449,656 (Negative NPV)

NOTE    

The Formula for calculating the Present Value Factor is [1/(1 + r)ⁿ], Where “r” is the Discount/Interest Rate and “n” is the number of years.